This Economic Recovery Is Surely Different: It's FUBAR*

*FUBAR: A slang term originating in WWII, (broadly) meaning “suboptimal”.

How many times in the past four years have you read the sentence, “This time, it’s different”? Well, in the case of the U.S. economy, this time it really is different.

The most recent recession, which the NBER says started in January 2008 and ended in June 2009, was severe, but it was not that much worse than the downturn of 1981 – 1982.

The recession that started in mid-1981 lasted almost as long as the 2008 – 2009 downturn (16 months vs. 18 months), and actually produced higher peak unemployment (10.8% vs. 10.1%). The most recent recession did see larger losses in real GDP (5.4% vs. 1.5%) and total employment (4.2% vs. 1.9%), but inflation was much worse at the start of the 1981 downturn (13.2% vs. 3.6%).

What has been really, really, really different this time has been our so-called “economic recovery”.

We have now completed 27 months of the Obama recovery, which the NBER says started in July 2009. The economy appeared to weaken during the summer, but assuming that 3Q2011 comes in the same as 2Q2011, then over the nine calendar quarters of recovery, real GDP (RGDP) will have grown by a total of 5.34%, equivalent to an annualized growth rate of 2.34%. In contrast, during the first nine calendar quarters of the Reagan recovery, RGDP grew at an annualized rate of 6.33%, for a total gain of 14.81%. This advance brought RGDP up to a level that was 13.13% higher than it was at the start of the 1981 – 1982 recession. However, after nine quarters of the Obama recovery, RGDP has yet to regain its pre-recession level (it’s still down by 0.08%).

During the first 27 months of the Reagan recovery, total employment increased by 7.51%, or 7.4 million jobs. In contrast, total employment in September 2011 was still 13,000 lower than June 2009. The Obama recovery has been the ultimate “jobless recovery”.

OK, but why are things so different this time? Let’s look at the past three years, from October 2008 through September 2011.

The past three years have been a very strange period in American economic history. Over this period, RGDP has grown at an average annualized rate of only 0.12%. The last time that this happened was 1980 – 1982. To find another period of such slow real growth, one has to go back to 1946 – 1948, when the U.S. was demobilizing after WWII.

However, even stranger than the performance of RGDP has been the path of nominal GDP (NGDP). Over the past 12 quarters, NGDP has grown at an annualized rate of only 2.38%. The last time it grew this slowly was 1932 – 1934. The shortfall in NGDP suggests that a major source of our economic woes is the Federal Reserve, just as was the case during the Great Depression.